The RCL Foods board has given its preliminary approval for the unbundling and listing of Rainbow Chicken, a move first mooted some years ago. The move will allow the company to focus on its branded foods business.
Lighthouse Properties, through its wholly-owned Spanish subsidiary, is to acquire the retail shopping centre known as Centro Commercial H2O, together with a vacant plot of land detached from H2O. The gross purchase consideration is €121 million which includes deferred capital expenditure of €10 million. Net of existing senior bank debt of €61,5 million, the purchase consideration will be funded from existing cash resources.
Following last week’s ruling by SA’s Takeover Regulations Panel, French media company Canal+ has been granted an extension to 8 April to publish a firm intention announcement to acquire MultiChoice shares from minorities. The media company has upped its mandatory offer from R105 to R125 per share, valuing the company at R55,3 billion. The initial offer price was higher than that paid when it acquired the latest shares on market and tipped it over the 35% threshold, triggering a mandatory offer to minorities. Even so, the R105 offer was rejected by MultiChoice as significantly undervaluing the group whose net asset value sits at c. R181 a share.
Hulamin has acquired the remaining stake in Isizinda Aluminium from joint venture partner Bingelela Capital. The primary activity of Isizinda is the management of properties. Prior to the transaction, Hulamin held a 38.7% stake.
MC Mining has appealed to its shareholders not to accept the off-market takeover bid of A$1.16 per share by Goldway Capital Investment. The offer will remain open until 5 April 2024 unless it is extended or withdrawn by Goldway.
The disinvestment by Gold Fields of its 45% effective interest in Asanko Gold Mine to Galiano Gold for gross proceeds of US$170m, has closed with all conditions precedent fulfilled on March 4, 2024. Goldfields received US$65 million in cash and 28,5 million shares in Galiano as upfront proceeds for the divestment. The remaining proceeds will be settled through deferred and contingent payments.
Unlisted Companies
Last-mile delivery and express parcel services company The Courier Guy, has been acquired by private equity firm Adenia Partners alongside co-investors DEG, Proparco and South Suez. Financial details were undisclosed.
The launch of a new, majority black owned venture capital fund, Conducive Capital, will invest in early- and growth-stage disruptive technologies. The fund aims to raise, in its first close in July 2024, US$15 million with a target final close of $50 million within 24 months.
French energy giant TotalEnergies and Qatar’s state-owned oil company QatarEnergy have together acquired a majority stake in an exploration licence of Block 3B/4B in the Orange Basin, off South Africa’s west coast. TotalEnergies acquired a 33% participating interest while QatarEnergy has taken a 24% interest. The stakes were acquired from existing shareholders Africa Oil South Africa, Ricocure and Azinam.
Astral has disposed of its minority 9.8% stake in Quantum Foods for an aggregate consideration of R141,7 million. The transaction, executed through a book over, was acquired by Country Bird at R7.25 per share – a 70% premium to the current market value.
Heriot Properties, a wholly-owned subsidiary of Heriot REIT, has acquired an additional 807 069 Safari Investments RSA shares from Reya Gola for a purchase consideration of R5.60 per share and an aggregate purchase consideration of R4,5 million. The purchase was executed by way of a cash settled on-market block trade on the JSE. Following the acquisition, Heriot Properties and its concert parties (excluding Reya Gola) will hold a 58.8% stake in Safari.
Lighthouse Properties has disposed of, on the open market, 164,973,138 Hammerson shares for an aggregate cash consideration of R1,02 billion.
Certain parties to loan contracts with Mantengu Mining have agreed to convert their debt claims against the company into equity at a rate of R1.50 of debt per Mantengu Mining share. The rate is a 93.58% premium to the 30-day VWAP prior to the date on which the settlement was agreed (29 February 2024).
Kibo Energy has announced the issue of 81,081,081 ordinary shares at an issue price of 0.00037 pence per share to a service provider in payment of outstanding invoices for a total value of £30,000.
Jubilee Metals has issued 9 million shares at an average price of 2.11 pence per option share following the exercise by an option holder. After the issue, the company will have 2,983,493,617 ordinary shares in issue.
A number of companies announced the repurchase of shares.
Brimstone Investment has, since its December year-end, repurchased 1,5 million ‘N’ shares for an aggregate R7,2 million.
Curro has repurchased an aggregate 21,201,450 shares during the period 15 June 2023 to 6 March 2024. The shares were repurchased at an average price per share of R9.97 for an aggregate purchase consideration of R21,2 million.
Invicta has concluded an intra-group repurchase with Humulani Marketing, a wholly-owned subsidiary of the company, in terms of which it acquired 762,492 shares from Humulani at a repurchase price of R26.92 per share. The shares will be held by Invicta in treasury.
The price for Adcorp’s odd-lot offer has been finalised. Those shareholders accepting the offer will receive R4.01 per share which represents a 5% premium to the 30-day VWAP at the close of business on 4 March 2024.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 26 February to 1 March 2024, a further 3,804,685 Prosus shares were repurchased for an aggregate €104,12 million and a further 268,583 Naspers shares, for a total consideration of R861,13 million.
AB InBev has repurchased a further 850,371 shares at an average price of €56.60 per share for an aggregate €48,13 million. The shares were repurchased over the period 26 February to 1 March 2024.
In August 2022 the trading of Afristrat Investment’s shares were suspended on the JSE. Since then, the company has been unable to make additional progress with regards to its restructuring initiative process due to its suspension and liquidation application. In its announcement, the company noted that as at 1 March 2023 it was unable to pay its debt and did not meet the solvency and liquidity test as required by the JSE. As a result, the company was commercially insolvent and would proceed with a liquidation application.
Three companies issued profit warnings this week: MTN, Exxaro Resources and OUTsurance.
Two companies either issued, renewed, or withdrew cautionary notices this week: MultiChoice and Astoria Investment.
While the Johannesburg Stock Exchange (JSE) remains Africa’s largest and most liquid stock market1, new equity listings and capital raising activity has decreased significantly over recent years (Figure 1). As this has corresponded with a large number of delistings, the pool of listed equity investment opportunities on the JSE has shrunk over this period. Some of this decline may be attributable to global macroeconomic factors, such as the COVID-19 pandemic, a volatile inflation and interest rate environment, and geopolitical tensions such as the Russia-Ukraine war, which have impacted global equity prices. However, as a developing country and relatively new democracy, South Africa (SA) also has some of its own unique and well publicised political, economic and infrastructure challenges, which have, at times, exacerbated the general risk-off approach towards emerging and frontier markets, and the flight of capital to perceived safe-haven assets2.
Figure 1 – Number of new equity listings on the JSE Source: JSE
The trends (Figure 1) are not unique to SA, with other international exchanges, such as the London Stock Exchange (LSE), also seeing limited appetite for new equity listings over recent years. However, the picture for the NASDAQ is more positive (Figure 2), with that exchange having benefitted from numerous technology companies coming to market. By contrast, only 5.6% of equity listings on the JSE are in the technology sector3.
Figure 2 – Number of new equity listings on the LSE, New York Stock Exchange (NYSE) and NASDAQ Source: S&P Capital IQ Pro
What we did see in SA was an increase in the deployment of private equity (PE) capital into technology-related businesses. The allocation to information technology increased from 1.0% in 2019 to 5.8% in 2022 (Figure 3)4, with a larger share also going to financial services, indicating a potential link with fintech. Is this a result of the early-stage nature of many of these endeavours, or has PE capital emerged as a preferred source of investment to fund growth, rather than the public markets?
Figure 3 – Allocation of PE capital in SA to information technology and financial services Source: South African Venture Capital and Private Equity Association Survey 2023
In 2022, South African technology companies raised US$830m through 95 rounds of PE funding, constituting 17% of the total funding, and 14% of the overall deal count, for PE-related technology transactions in Africa5.
Increased costs, additional regulation and rigorous reporting requirements are regularly cited as reasons for companies to avoid public listings. Critics argue that these restrict the ability to be entrepreneurial and agile, which is especially relevant to early-stage growth companies where heightened scrutiny from the wider investor community and media restricts one’s ability to manoeuvre.
While managing listed companies (and public opinion) comes with its challenges, it brings with it the benefit of deep pools of capital in SA. Many institutional investors hold that regulation and reporting requirements can be advantageous, contending that effective management should possess the discipline and skills to handle these aspects as an integral part of business operations and growth. Retail investors also benefit from the additional regulatory protection in the listed environment.
Interestingly, as ESG becomes increasingly influential in capital allocation, whether for public or private investment, and PE capital expands (partly due to a shrinking listed universe), one might anticipate a convergence in certain regulatory standards and investment criteria between the two markets over time. The cost of sound advice and rigorous systems should be outweighed by the long-term benefits of building a transparent, accountable and sustainable business, able to draw on deeper pools of capital.
Will there be a tipping point where new equity listings return to public markets in SA, with robust systems to allow for transparency and ease of trade? Or will PE develop over time, to the point where it can provide a similar offering to retail investors? While the increased prominence of PE is likely here to stay, we expect that listed markets will, over the long term, continue to provide an effective platform to sufficiently mature companies seeking to raise capital for continued growth. In an environment that offers transparency, deep pools of capital and an enhanced profile, companies can also continue to grow acquisitively through issuing shares that have earned a premium by demonstrating their ability to run a business under wider scrutiny.
Will SA have its own tech listing boom when private capital markets have played their role in funding startup and early-stage businesses that have been developed locally and reached a point of maturity fit for public markets? While the JSE may benefit from SA’s position as one of the largest hubs for innovation in Africa, the NASDAQ can be attractive to SA technology companies as it has, at times, seen substantially higher valuations being achieved for new tech listings. However, it may be sensible for SA technology companies to consider a JSE listing as a first step, allowing them to establish a track record with investors and build their profile, thereby better positioning themselves for a potential future international listing.
1 Riscura and BrightAfrica – Liquidity (https://brightafrica.riscura.com/listed-equity/liquidity/#:~:text=The%20Johannesburg%20Stock%20Exchange%20(JSE,USD%201%20431m%20traded%20daily) 2 Riscura and Bright Africa – Liquidity 3 JSE 4 South African Venture Capital and Private Equity Association Survey 2023 (https://savca.co.za/wp-content/uploads/2023/09/SAVCA-PE-Survey-2023-Electronic.pdf) 5 2022 Partech Africa Report (https://partech-admin.prod.unomena.io/media/documents/2022_Partech_Africa_Tech_VC_Report.pdf)
Terence Kretzmann is a Director and Bhargav Desai a Junior Corporate Financier | PSG Capital.
This article first appeared in DealMakers, SA’s quarterly M&A publication
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Growth continues at ADvTECH (JSE: ADH)
Enrolments at the schools are in line with targets for 2024
ADvTECH has released a trading statement for the year ended December 2023, reflecting growth in HEPS of between 16% and 21%. That’s really good. They also report normalised earnings per share to strip out corporate action costs and once-off transactions, with that metric up by between 17% and 22%.
Whichever way you cut it, the numbers seem to be appealing. ADvTECH notes that all divisions contributed to the performance and that enrolments at the schools are in line with targets for 2024, so that bodes well for the new financial year as well.
Brimstone: debt reduction and share buybacks (JSE: BRT)
But why such a high dividend?
Brimstone is an investment holding company that holds a wide variety of interests. Some are controlling stakes and others are minority holdings, so you end up with a rather odd scenario of an investment holding company preparing consolidated accounts with all the different line items. I don’t think that is helpful for decision makers, so I ignore the income statement.
The balance sheet and supporting notes is where I think you’ll find what you need here. The intrinsic net asset value (or INAV) is management’s view of what the assets are worth. They show it in great detail and arrive at R12.13 per share, down from R13.25 per share a year ago. The share price closed 17% lower at R4.56, so the discount to INAV is vast.
How does this discount get closed? Much of it is structural, of course. Still, a strategy of disposing of assets at a price close to or at the INAV and then buying back Brimstone shares at a deep discount does wonders in companies like these. It just requires the directors to consciously decide to make the group smaller, which is where this often becomes a problem.
Brimstone is selling off certain investments and has reduced debt by R307.5 million since the end of December. During the year ended December 2023, the company repurchased shares worth R21.6 million, with more repurchases of R7.2 million subsequent to year-end. That all sounds like good stuff.
Unfortunately for shareholders, the company also insists on paying out a high proportion of HEPS as a cash dividend, despite the discount to INAV. This immediately makes me feel that the group is more of a cash cow for the controlling shareholders rather than a serious attempt at reducing the gap to INAV for minority shareholders. With HEPS of 71.6 cents and a dividend of 40 cents per share despite the vast discount to INAV, this is why I don’t hold shares in Brimstone.
Losses have narrowed at Murray & Roberts (JSE: MUR)
The debt also looks far better, but there’s a long way to go here
Murray & Roberts has lived through troubled times recently. Although revenue and EBITDA have both moved higher, the real highlight is the massive swing from an attributable loss of R2.5 billion to just R95 million. A loss should never be celebrated, but the context is important here.
The diluted headline loss per share from continuing operations came in from 16 cents rather than 27 cents in the comparable period, so losses have also narrowed on a headline basis with impairments and other issues stripped out.
The most important line is net debt, which has improved dramatically from R1.97 billion to R247 million.
Based on these numbers, it shouldn’t surprise you that no dividend will be declared for the full year ending June 2024. At least you’ve been warned. Instead, the company will be focusing on a sustainable capital structure and bedding down the new operational structure that sees the managing directors of the four operating companies all appointed to the group board.
Group CEO Henry Laas has agreed to stick around until August 2025.
Mustek will want to forget about 2023 (JSE: MST)
Cheap stocks can stay cheap – and still rise and fall with earnings
When you’re buying a stock on a low earnings multiple, you need to still be careful of a value trap. There needs to be some kind of catalyst for the multiple to move higher sustainably, otherwise all that happens is the multiple stays consistently low and the share price flaps around based on the financial results anyway.
At Mustek, the low trailing multiple turned out to be a sensible approach from the market. Investors were wary of whether the good times could continue. Spoiler alert: they couldn’t.
For the six months to December 2023, revenue fell 13%, gross profit margin contracted by 70 basis points to 13.4% and operating profit was down 25.3%.
By the time you get to HEPS, it’s down 58.81% from 221.74 cents to 91.34 cents. Although this is only an interim number, the share price of R10.34 suddenly doesn’t look like such a bargain.
And in case you’re wondering, the joy of capitalist competition is playing out in green energy products. This has been a major source of the reduction in gross profit. When you are thinking about a business, you always have to consider the threat of competition in a lucrative space and what this would do for prices.
Quilter celebrates record profitability (JSE: QLT)
Go with the flows
Quilter is a UK-based asset and wealth management business that understands the importance of a distribution strategy to attract inflows. In simple terms: they are quite good at selling investment products. This is absolutely critical to manage periods of tough returns in the market. When times are good, this is a flywheel effect that leads to great profits.
How do you measure this? Core business net inflows. Although they will definitely be volatile each year (as we saw at Quilter in 2023 where they were far lower than the prior year), the point is that inflows are good and outflows are bad. Provided assets are still growing, the asset manager is doing the right thing.
With Assets under Management and Administration up 7%, of which 1% is attributable to net inflows, revenue increased by 3%. Thanks to costs decreasing by 3% as the group focused on profitability, adjusted profit before tax was up 25%.
It’s interesting to see how financial distortions come through. HEPS has actually fallen severely from 12.6 pence to 3.2 pence, yet adjusted diluted earnings per share increased from 7.9 pence to 9.4 pence. The difference seems to be due to policyholder tax outcomes.
Cash, as always, is king. The dividend per share moved higher from 4.5 pence to 5.2 pence. The share price is roughly 25% higher over the past 12 months.
Finance costs eat up the profits at Sea Harvest (JSE: SHG)
Yet another example of banks getting the benefit of corporate growth
At Sea Harvest, we can see an income statement profile that has played out in many corporates in the past year.
Revenue increased by 6% and gross profit was up 13%, which is great as this means that gross profit margin moved higher. The theme here is improved pricing that more than offset lower sales volumes. The weak rand also plays a role here.
None of it helped at operating profit level sadly, which fell 2%. Load shedding related costs jumped from R25 million to R46 million for the year.
We then arrive at the net finance costs line, which jumped by a whopping 79%. This is a combination of interest rates being much higher than the previous year, along with higher average borrowing levels.
Thanks to the bankers getting such a great outcome, HEPS was down 5%. Despite this, the final dividend moved higher from 38 cents to 40 cents per share.
Looking ahead, the South African business will look to take advantage of the 5% increase in the Total Allowable Catch. The rest of the business will focus on managing the usual supply-demand fluctuations in the broader seafood market. And of course, there will be a lot of attention on the deal to acquire 100% of Terrasan’s pelagic fish business and 63.07% of Terrasan’s abalone business.
Little Bites:
Director dealings:
In a very unusual transaction, directors of Stor-Age (JSE: SSS) have been able to sell shares that were acquired via a scheme that included an interest-bearing loan from the company. This is a typical structure in the property sector, with dividends on the shares applied against the interest. What makes this unusual is that an institutional shareholder has made an offer to the directors to buy their shares under the scheme, thereby allowing them to settle the debt and pocket the difference. The price for the trade is R14, which is only slightly below the current market price. Three directors sold a collective R104 million worth of shares in this trade.
As part of a funding transaction with a financial institution, CEO of Sibanye-Stillwater (JSE: SSW) Neal Froneman exercised a put option to sell R96.4 million worth of shares in the company at R66.24 per share. For context, the current share price is R19.50!
A director of Gold Fields (JSE: GFI) sold shares worth R11.75 million. These are vested performance shares all the shares were sold, not just the portion to settle taxes.
Lighthouse (JSE: LTE) has sold shares in Hammerson worth just over R1 billion. This unlocks a lot of capital for Lighthouse to pursue yield-accretive direct property acquisitions.
MTN Uganda (JSE: MTN) released results for the year ended December 2023. Service revenue increased by 16.1% and EBITDA was up 16.3%, so at least margins are consistent. Capital expenditure moved 5.5% higher and the final dividend was 16.4% higher. This is a better trend than we’ve seen in MTN’s other African subsidiaries.
Eastern Platinum (JSE: EPS) announced that the initial soft start of the Zandfontein underground operations at the Crocodile River Mine is now fully operational. They will now focus on ramping up underground efforts and bringing material to the surface, with the first batch of run-of-mine processing scheduled for the second quarter of this year. The goal is to achieve a mining run rate of 40,000 tons per month by the end of 2024.
Clientele (JSE: CLI) has appointed Angela Pillay as Executive Financial Director. She has extensive experience in financial services.
It says something about the maturity and strategic direction of Jubilee Metals (JSE: JBL) that the company has appointed formal boards for both the South African and Zambian businesses. Separately, the company announced that an option holder will exercise 9 million options at an average price of 2.11 pence per option, so be careful of ongoing dilution here.
The end is nigh at Ellies (JSE: ELI), with the latest news being the resignation of the CFO and an independent non-executive director.
Afristrat (JSE: ATI) will proceed with a liquidation application as the company is commercially insolvent.
Luxe Holdings eventually put us all out of its misery by delisting in November 2023. This hasn’t stopped the JSE from issuing a public censure and fine of R7.5 million against Helena Dorothea Grewar, who was CEO at the time. She sold shares worth R12 million in the closed period, which absolutely isn’t allowed. To make it worse, the JSE says she didn’t even engage with regulatory correspondence, which isn’t a smart strategy. On top of the fine, she has been disqualified from holding office as a director of any JSE listed company for a period of 5 years.
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Curro hasn’t been shy with fee increases (JSE: COH)
The financial impact is positive for now, at least
The South African middle class is finding things very difficult right now. Curro is also finding it rather tricky to fill the schools that have been built, perhaps because of these problems plaguing the middle class. In a rather risky strategy from a long-term perspective, Curro seems to be addressing the issue of empty seats by hiking fees where there is a bum on a chair, putting even more pressure on those consumers.
Tuition fees increased by 12%, driving a revenue increase of 15%. The weighted average number of learners only increased by 2%. The rest of the revenue growth is explained by ancillary revenue, which was 33% higher.
Don’t be fooled into thinking that the teachers are getting rich. Employee costs were up 7% and other costs increased by 19% (both on a like-for-like basis).
This means that margins moved sharply higher, with EBITDA up 25% net of head office expenditure. HEPS increased by 19%. Recurring HEPS increased by 32%.
Cash from operating activities only increased by 9%, so the balance sheet has some catching up to do to the income statement performance.
When you consider the extent of tuition fee increases, it’s surprising that Curro makes the statement that the primary focus in the short to medium term is to support and increase the capacity utilisation of existing facilities. That goal doesn’t sound congruent with an approach of above-inflation fee hikes. I worry about how sustainable this approach is.
The MultiChoice offer is up to R125 a share (JSE: MCG)
This is an interesting structure
If you’ve been following the news around MultiChoice, you’ll know that Canal+ needs to make a mandatory offer to shareholders of MultiChoice. The price would’ve been around R105 per share, but to try and expedite the process of a transaction, Canal+ has increased it to R125 per share and MultiChoice has agreed to cooperate in this regard.
Although we don’t know for sure yet, this implies that the MultiChoice independent board is more likely to support this offer than the last one. Having said that, they’ve behaved in an unpredictable manner before. Anything is possible.
Nedbank hit a number of key targets in 2023 (JSE: NED)
Growth in the final dividend of 18% is a solid outcome for investors
Nedbank’s share price enjoyed a strong day on the market, closing 3.3% higher in response to a strong set of numbers for the year ended December 2023. Goodness knows it was a tough year for the economy, with banks reaping the rewards of higher interest rates and larger balance sheets from inflation. There weren’t many winners in the economy outside of the banks!
Nedbank managed to grow revenue for the year by 12%, with net interest income up 14%, non-interest revenue up 6% and associate income up 64%. A 30% jump in impairments blunted the growth at HEPS level, which came in at 11%. The positive surprise here was that the credit loss ratio improved significantly in the second half of the year, coming in at 109 basis points for the full year vs. 121 basis points in the interim period.
This strong end to the year saw Nedbank meet several key financial targets, including a return on equity ahead of the cost of equity (15.1% vs. 15%) and a cost-to-income ratio below 54.0%.
Thanks to these efforts, the final dividend is up 18% at a payout ratio of 57%. The full-year dividend is 15% higher than the prior year.
After a 14-year innings, Mike Brown steps down as CEO and hands over to Jason Quinn. Having had the pleasure of engaging with Mike very early in my banking career, I know that he did an excellent job of navigating an exceptionally disappointing period for the South African economy. Quinn will need to make sure his old red ties are right at the back of the cupboard, with only green ties coming out as he leads the bank through a period that doesn’t look to be getting any simpler in our country.
Premier is on track for a maiden dividend (JSE: PMR)
The focus has been on reducing debt and improving the balance sheet
With Premier attending the Bank of America Sun City conference this week, the company has released an update on recent trading performance.
After the first six months of the year showed the slightest growth in HEPS (up 0.8% despite revenue being up 7.1%), investors couldn’t exactly have been expecting a rocketship for the second half of the year. Indeed, as inflation in soft commodities has settled down, revenue growth has moderated to low single digits.
This means that Premier has focused on maintaining margins, which are in line with the margins for the first six months of the financial year.
Interestingly, the company isn’t pulling back on organic investment opportunities. In fact, capital expenditure for the second half of the financial year is expected to be higher than guidance.
Despite the higher capex, the company has focused on reducing debt on the balance sheet and improving its leverage ratio. The company believes that it is on track to pay a maiden final dividend for the year ending March 2024.
Market share gains yet again for Shoprite (JSE: SHP)
If only we had a reliable electricity supply…
The snowball effect in the grocery market is quite something to witness, with Shoprite continuing to charge forwards and Pick n Pay whimpering in the corner. Somehow, Spar manages to eek out a living and Woolworths is trying to remain relevant to consumers by being more aggressive on price. It’s rather hectic out there.
After strong growth in sales in Supermarkets RSA of 17.5% last year, a 14.6% increase in sales in the latest interim period is an impressive result. The rest of the market could only manage growth of 7.6%, according to NielsenIQ data quoted by Shoprite.
The main thing that has continued to impress me is Shoprite’s ability to grow at every part of the income curve. Everyone talks about Checkers this and Checkers that, yet Shoprite and Usave casually increased sales by 13.1%. They have done some astonishing things in that business to create meal solutions for very low income workers. Checkers and Checkers Hyper grew by 13.7%, so as great as Checkers is, it doesn’t deserve all the attention.
Checkers Sixty60 grew by 63.1%, so the turquoise scooter army rides on.
Taking a geographical view, Supermarkets non-RSA grew 6.2% and Supermarkets RSA grew 14.6%, so the group’s decision to focus on winning in the South African market is paying off. Within the local business, customer visits were up 6.4% and average basket spend increased 7.7%, so Shoprite is winning the sales volumes war at a time when most FMCG businesses in South Africa are only achieving growth through hiking prices.
Gross margin increased ever so slightly from 23.5% to 23.6%, with higher volumes through the tills creating efficiencies back in the supply chain.
Unfortunately, the broader operating conditions (read: load shedding) really blunted the benefit of this sales growth by the time we reach the profit lines on the income statement. Trading profit was up 10.7%, with trading margin down 20 basis points to 5.5% due to R500 million spent on diesel for generators.
Thanks to Eskom, operating profit was up by “only” 8.1%, despite the substantial growth in sales. You can now clearly see why competitor Pick n Pay is getting crushed at the moment, with modest sales growth and the same expense pressures.
Profit after tax only grew by 4.2% at Shoprite and HEPS was up 7.3%, with the dividend per share up by 7.7% as the payout ratio was increased.
For the first six weeks of new financial period (the second half of 2024), Supermarkets RSA has grown 10%. Inflation has slowed down from 7.7% to 5.3%, so that should cause a dip in the growth rate. Shoprite is also quick to remind investors that they are lapping a very strong base.
Sibanye-Stillwater hopes for better PGM prices (JSE: SSW)
The company believes that price weakness in PGMs is temporary rather than structural
Sibanye has certainly had a year to forget, with a massive decrease in the share price as the PGM market fell apart. Revenue for the full year was 18% lower than in 2022, with nickel prices also doing their fair share of damage.
The loss for the period was a colossal R37.4 billion. The good news is that non-cash impairments were R47.5 billion, so the cash situation wasn’t anywhere near that bad. Still, there’s no final dividend, so the full-year dividend was entirely comprised of the interim dividend of 53 cents per share.
If there are any highlights here, it’s that net debt to adjusted EBITDA is 0.58x. The other highlight is the turnaround in the gold operations, helped of course by the higher gold price. The gold operation is too small to save the day by itself though, particularly when you compare its EBITDA for the six months to December (positive R1.148bn) to the losses in the nickel business of R701 million. The net contribution is very small relative to the PGM operations.
In other words, for Sibanye to work out, the PGM price needs to move heavily in the right direction. The recent shift in sentiment away from battery electric vehicles could help here. This is why I’ve very gingerly topped up my PGM exposure in literally the past week, as I think the hype around EVs is finally starting to do what I believed would always happen: disappear.
I’m well aware that any PGM position requires an extremely strong stomach and modest position sizing.
WBHO declares an interim dividend (JSE: WBO)
There is a substantial improvement in profitability at WBHO
Construction companies have a long sales cycle. They first need to secure a strong order book before revenue starts to flow in, so investors have to be patient. The efforts in the order book in the prior period have paid off at WBHO for the six months to December 2023, with revenue from continuing operations up 29% and HEPS coming in at 897 cents vs. 630 cents in the comparable period (growth of 42%).
The net asset value of the group has jumped from R3.3 billion to R4.4 billion. In further good news, the strong order book is still there, sitting at R32.3 billion vs. R32.6 billion as at June 2023.
This has allowed the group to declare an interim dividend of 230 cents per share vs. no interim dividend in the comparable period.
Little Bites:
Director dealings:
The CEO of Bidcorp (JSE: BID) has sold a substantial R26.7 million worth of shares in the company. After the run in the price over the past couple of years, I would take careful note of this.
The outgoing CEO of Aveng (JSE: AEG) sold all the share options that vested on early retirement, for a total of almost R4.4 million. That counts as a sale in my book, as executives usually only sell the portion required to pay the tax.
Gold Fields (JSE: GFI) has finalised the sale of its 45% interest in Asanko Gold Mine for gross proceeds of $170 million plus a 1% net smelter royalty. $65 million in cash has been received, as well as shares in the acquirer Galiano Gold. The balance of the price is receivable over the next couple of years.
There is very little liquidity in Putprop (JSE: PRR) so I’ll give the latest financial results a passing mention here. The company owns a portfolio of 13 properties. Net asset value moved from R16.14 to R16.29 over the past year. The dividend per share increased from 4.25 cents to 6 cents.
If you are interested in Omnia (JSE: OMN), then the company’s presentation at the Bank of America Global Research 25th Annual Sun City Conference 2024 (yes, it’s that much of a mouthful) will be useful for you to read. You can find it here.
Libstar (JSE: LBR) released a trading statement that has an update to the HEPS guidance based on the exclusion of insurance proceeds from the Denny fire incident. Total HEPS (without adjustments for this issue) will be between 3.5% and 8.5% higher for the year ended December 2023.
The dilution continues for shareholders in Kibo Energy (JSE: KBO), with the company issuing shares worth £30k to settle a service provider’s outstanding invoices.
Annual Results for the year ended 31 December 2023
All 2023 targets met – a strong foundation from which we shift focus to deliver on our medium-term targets.
While we were pleased to have achieved all our 2023 targets while operating in a more difficult economic environment, we aspire to deliver ongoing improvements in ROE to increase shareholder value. Our strong financial performance in 2023, together with the progress made in executing on our strategy and underlying momentum in the business, gives us confidence in delivering on our medium-term targets* and, in particular, our aim to increase our ROE to 17% by 2025 and above 18% in the long term.
Nedbank Group is one of South Africa’s four largest banks, with Nedbank Limited as their principal banking subsidiary.
They offer the following solutions through their frontline clusters, Nedbank Corporate and Investment Banking, Nedbank Retail and Business Banking, Nedbank Wealth and Nedbank Africa Regions: – a wide range of wholesale and retain banking services – a growing insurance
RCL Foods delivers pleasing Interim Results in a challenging environment.
Muted demand persists in a challenging economic environment
Rainbow turnaround yields positive result
Continued good Sugar performance
Service levels restored in Pet Food and Pies
Load-shedding direct costs continue to impact earnings
Receipt of Vector Logistics sale proceeds improves cash position
We remain committed to our overarching business strategy as previously communicated, which includes improving shareholder returns as we seek to GROW WHAT MATTERS for all our stakeholders. I am pleased to say that we are on track with our strategy delivery plan for the 2024 financial year, supported by the rollout of our Purpose across our Value- Added Business.
RCL FOODS’ Chief Executive Officer, Paul Cruickshank
RCL FOODS is a deeply-rooted South African consumer goods business that produces some of the country’s most-loved brands: Yum Yum peanut butter, Nola mayonnaise, Ouma rusks, Pieman’s pies, Number 1 mageu, Sunbake and Sunshine bread, Supreme flour, Selati sugar, Simply Chicken, Rainbow chicken, Bobtail and Canine Cuisine dog food, Catmor and Feline Cuisine cat food, and Molatek and Epol animal feed, to name a few. It also produces a wide range of speciality and private label products.
Headquartered in Westville, Durban, the business employs over 16 000 people across 8 provinces in its Value-Added and Rainbow operations. At the heart of its culture and strategy is its Purpose – WE GROW WHAT MATTERS – which encapsulates its belief in collectively doing that little more to create a positive impact that matters.
By Nico Katzke, Head of Portfolio Solutions at Satrix*
Just over a year ago we were all enthralled by the emergence of a technology that promised to disrupt all facets of our lives.
What started as a live social experiment of opening large Natural Language Processing (NLP) algorithms, in the form of ChatGPT, to answer the public’s unscripted questions, soon proved so effective that most see it as a technology with the potential for hard-to-even-comprehend disruption.
Most of us are currently observing, with both interest and anxiety, the rapid rise of this technology, wondering how this will impact and reshape the industries we work in.
Many observers’ enthusiasm was somewhat curbed in recent months by the realisation that physical limitations exist in building larger and ever more capable training models. It turns out, when we ask ChatGPTa question online, somewhere a machine is whirring and crunching numbers. It is, after all, not magic. Nor is it a tireless sentient being answering our questions – it is simple a set of machines doing complex math. The more we ask of it, the bigger it needs to be.
Despite clear physical and hardware challenges, to many it seems the future domination of Artificial Intelligence (AI) through Large Language Models (LLMs) is inevitable. Others are more sceptical.
First, it is costly. Building, training and maintaining these models require incredible costs and expensive manpower, access to enormous datasets and advanced chip making infrastructure. In fact, Sam Altman, CEO of OpenAI, the creators of ChatGPT, is reportedly looking to raise up to $7 trillion to further boost GPU-chip supply, critical in building more capable algorithms able to power the truly disruptive promise of AI. That number is greater than Apple and Google’s market caps combined, and while other executives (notably the CEO of Nvidia, the leading chip maker) have been critical of these numbers, most estimates suggest a chip making industry worth several trillion dollars in the near future.
Apart from hardware limitations, other key drawbacks include the environmental costs associated with training and managing these energy hungry algorithms, the inherent biases that undocumented training could embed in model responses with limited recourse, the inability of modelers to reverse engineer parameters (making it a black-box process by design), as well as the lack of ethical scrutiny required to ensure it is safely deployed on society.
Proponents of AI’s unbridled growth might point to these being fixable problems; eggs broken in the pursuit of a sentient omelette.
But a bigger problem might lurk in its current design that should give even the most optimistic pause: the lack of Intelligence, or the “I” in AI. People are mesmerised by Generative AI’s output and the illusion of understanding that it possesses. It also doesn’t help that researchers and companies at the forefront of its development have strong incentives to feed this illusion with anthropomorphic language like learning, intelligence and reasoning.
But at its core, the models we interact with are simply computer algorithms trained on human supplied information (think all the public Reddit, Wikipedia, etc. pages), that take text as input and produce answers by predicting what word (or what pixel, when drawing) should come next.
It is, ultimately, super-efficient predictive text strung together in a way that, given its vast library of human conversational data for training, seem intelligent and human-like. But it is a parrot, not a mind.
A remarkable achievement in mimicry and information collation, but not sentient and completely void of understanding. It is simply pattern matching at unprecedented scale, meaning its current design will always scupper its ability to “think” outside the (very black) box. Even if a methodology is identified that can bring us to the holy grail of Artificial General Intelligence (AGI), that doesn’t mean that it will necessarily be achieved. Think the decades long pursuit of nuclear fusion which is theoretically possible.
While we believe the destination of broad-based adoption of some form of AI across industries is still a way off, we have been thrust upon a path to discover its full potential. But the path still needs to be paved, sidewalks erected and streetlamps put in.
The biggest current opportunities therefore are likely with companies able to harness their size and scale to access the best minds and computer hardware needed to build the foundation for tomorrow’s application. Small and nimble are not traits that help with securing trillion-dollar chip deals or access to enormous computing warehouses.
A sensible proxy for investing in the future of AI may very well be an index comprised of larger, more established tech companies, like the Nasdaq 100. Despite returning more than 50% in US$ in 2023, if the future is indeed broad-based adoption of AI, then which sentient being currently dares bet against the established tech giants in the Nasdaq?
*Satrix is a division of Sanlam Investment Management
Disclaimer Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Afrocentric is struggling to find growth (JSE: ACT)
This isn’t an easy way to make money
AfroCentric owns a portfolio of healthcare-related enterprises that are finding it tough going at the moment. Aside from the overall lack of economic activity to drive growth, the company has had to contend with contracts with low levels of profitability. In some cases, the company has walked away from such contracts.
After all the excitement of the deal with Sanlam last year, there isn’t any excitement at all in the financials. For the six months to December 2023, revenue grew by just 1.4% and HEPS dropped by 2.4%. If there are going to be any exciting synergies with Sanlam, we aren’t seeing them yet.
At least there is an interim dividend of 11 cents per share vs. no dividend in the comparable period.
Not much to write home about at Aspen (JSE: APN)
Revenue growth hasn’t translated into profits
The six months to December 2023 were filled with interesting strategic news at Aspen, like a distribution and promotion agreement with Lilly, as well as the product purchase agreement with Viatris for Latin America and the acquisition of the Sandoz business in China.
The benefits of these initiatives will hopefully come through in the second half of the financial year, as the first half hasn’t been exciting. Although revenue increased by 10% as reported, HEPS was down 6% as reported or up 1% on a normalised basis.
The highlight was the 44% growth in operating cash flow per share, with the cash conversion rate way up from 58% to 89%. A reduction of investment in heparin inventory was the key here. They call it a permanent shift, which is good news.
Net debt has increased considerably from R22.2 billion to R27.3 billion. Although overall debt levels are comfortable, debt isn’t a cheap source of growth right now.
Shareholders will pay very close attention to the second half of the year, which is when the benefits of recent strategic initiatives are expected to be realised.
AVI: masters of operating leverage (JSE: AVI)
The beverages and snacks businesses led the charge
AVI has released results for the six months to December 2023. They reflect an increase in revenue of 7.1%, which is decent by FMCG standards in this environment. More impressively, the company achieved growth in HEPS and the interim dividend of 17.4%.
At segmental level, Entyce Beverages is the second-largest revenue contributor and also grew the most, up by 16%. Snackworks is the bigger hero though, with the largest revenue and operating profit contribution and an excellent increase in profit of 35.1% off just a 9.8% increase in revenue. It turns out that biscuits really are good for you!
Fish? Not so much. I&J saw revenue fall 5.1% and operating profit plummet by 56.0% due to poor catch rates and loss of export sales.
The company has warned that growth in the second half of the year may not be as exciting as the first half, as they are lapping a strong fourth quarter in the comparable period.
Bidvest reminds the market why it is so respected (JSE: BVT)
There’s a strong performance at trading profit level
Bidvest has released results for the six months to December 2023. Revenue grew by 8.8% and trading profit by 11.8%, showing solid operating leverage that shareholders love to see. Cash generated by operations almost doubled to R3.7 billion!
Five of the seven divisions reported double digit trading profit growth, so the group can be proud of that. Automotive took a significant knock, with trading profit down 11.4% due to oversupply of new vehicles and a resultant knock-on effect in the used market. The brand mix at McCarthy’s is problematic as Bidvest doesn’t have exposure to new brand entrants that are doing well.
These strong numbers were blunted somewhat at HEPS level, with HEPS up by 5.3% and normalised HEPS up by 6.9%. The final dividend followed suit, up 6.9%. It won’t surprise you to learn that net finance charges were to blame here, up 41.5% excluding IFRS 16 and other fair value adjustments (in other words: a pure view on the increase due to debt).
The jump in finance costs was driven by higher average gross debt (of which R3.2 billion was due to corporate actions) and an increase in average cost of funding from 5.2% to 6.1%.
Return on Invested Capital of 15.8% is down on 16.3% in the prior year but still ahead of the weighted cost of capital.
Hulamin was all about the cash in this period (JSE: HLM)
Despite normalised EBITDA dropping by 7%, cash flow from operations skyrocketed
It is critically important for companies to manage both the balance sheet and the income statement, particularly when they are serious about driving return on capital higher. If a company doesn’t focus on return metrics like those, run away as fast as you can. This is why looking at the change in working capital and the extent of capex is just as important as looking at the income statement.
In Hulamin’s numbers for the year ended December 2023, a drop in volumes and EBITDA didn’t set an encouraging scene. Thanks to a substantial effort in reducing working capital requirements and simplifying the business, cash flow from operations was 503% higher at R363 million. That’s still not a great conversion rate vs. EBITDA of R620 million, but it’s a lot better.
Capex was R311 million, so shareholders seem to get very little cash out of this thing. Investors also won’t be enthralled by the performance in HEPS, which fell by 11% as reported or 27% on a normalised basis.
MAS could have a tougher route forward than expected (JSE: MSP)
The balance sheet outlook is proving to be difficult to solve
In the six months to December 2023, MAS grew adjusted earnings per share by 6%. The tangible NAV per share was up 10% in euros. This is good stuff, so why has the share price dropped sharply in the past year?
Despite the best efforts of the company on the income statement and the management of the properties in the portfolio, the trouble lies in the EUR300 million Eurobond that was issued in 2021. The goal was to reach investment grade and refinance the debt by 2025 / 2026. Nothing ventured, nothing gained.
Sadly, it’s not going to happen due to various factors. The bond market for non-investment grade issuers has completely dried up, which means the refinancing of the debt in 2025 / 2026 will be much more difficult and more expensive than hoped.
To the company’s credit, they are trying hard to get ahead of this problem. They are raising secured debt on unencumbered properties and they suspended the dividend.
A further recent setback is that banks are viewing MAS and the joint venture with Prime Kapital as a single group from a credit perspective. This is hurting the ability to borrow for both MAS and the joint venture, due to credit exposure limits that banks place on groups.
The net result isn’t pretty. Either MAS will have to raise debt with dividend restrictions post the 2026 calendar year, or there might even be a rights issue. A sale of assets may also be needed, which takes the group even further from an investment grade rating.
When credit markets move against you, life becomes hard in property funds.
Higher earnings and cash at Merafe (JSE: MRF)
2023 was a decent year in the end
Like all local mining groups, Merafe has had to negotiate failing South African infrastructure and all the other challenges that come with being in this industry. Nonetheless, a trading statement tells us that HEPS for the year ended December 2023 increased by between 4% and 24%. That’s solid.
The other good news is that cash and cash equivalents increased by just over R50 million in the six months from June to December, now at R1.656 billion. Admittedly, a chunk of this is set aside for future environmental rehabilitation obligations.
Detailed results for the year are expected on 18 March.
Metrofile is growing far too slowly (JSE: MFL)
The bankers are getting more excitement here than shareholders
In a world of exotic cocktails and food, Metrofile is like ordering the cheese sandwich on white bread, with a glass of tap water. It will fill you, but you might die of boredom midway through eating it.
Revenue grew by 2% for the six months to December 2023 and EBITDA fell by 4%. Exciting, hey? Due to higher interest rates, HEPS sadly dropped by 13% as bankers got a proportionately larger share of the pie vs. the prior year. Net debt is up 3% to R507 million.
The interim dividend is down 22% to 7 cents per share.
In case your bull case is related to the United Arab Emirates and Oman, you should know that revenue increased 28% (yay) but operating profit fell by 48%. Oh man, indeed.
Each to their own, I guess. This one isn’t for me:
At Netcare, mental health activity remains above pre-pandemic levels (JSE: NTC)
And revenue has grown by 5% for the first quarter of the year
Netcare is participating in an investment conference this week, so the company has released a voluntary announcement for the benefit of the rest of us who aren’t invited to the cool kids party.
For the five months to 29 February 2024, total paid patient days grew 0.3%. The announcement gives all kinds of different periods unfortunately, but the crux here is that growth is coming from revenue per paid patient day. For the first quarter of the financial year, total group revenue increased by 5% and total operating costs have been “well contained” despite the inflationary environment.
It’s also worth highlighting that demand for mental health remains strong, which isn’t a shock for anyone dealing with adulting.
Raubex grows despite Beitbridge having been completed (JSE: RBX)
The company wasn’t expecting to grow against a tough base period
Thanks to an increase in tender activity, Raubex has done better than they thought they would. The order book is strong despite the macroeconomic conditions, which is great news for investors.
This is why the company expects HEPS to be between 0% and 10% higher for the year ended 29 February 2024. This may not sound like much of an achievement, but the Beitbridge Border Post Project was in the base period and not in this period. To be flat or slightly up from there is impressive.
A pot of gold at the end of the RCL Foods rainbow (JSE: RCL)
There has been a sharp recovery
RCL Foods has released results for the six months ended December 2023 and they tell a great story. Revenue from continuing operations is up by 8.4% and EBITDA has jumped by 48.6%.
By the time we reach HEPS, we see growth of 52.6% in continuing operations and 43.3% overall. The discontinued operation in question is Vector Logistics, which was sold in August 2023.
Despite Avian Influenza in this period, Rainbow was one of the major areas of improvement for the period. It shows just how rough things were for poultry businesses in the comparable period.
Sugar also improved, with higher market prices that more than offset the impact of lower crop yields. Across the other food businesses, it looks like performance was mixed.
The Rainbow chicken business remains the lowest margin business in the group:
The big news here is that Rainbow is set for an unbundling and thus separate listing on the JSE. This will allow investors to take a pure view on either the poultry or other foods businesses. Currently, investors have to accept a very mixed exposure when buying shares in RCL Foods.
Due to the separation of Rainbow, RCL Foods has not declared an interim dividend.
Little Bites:
Director dealings:
The CEO of RH Bophelo (JSE: RHB) bought shares worth just under R20k.
Canal+ has been granted an extension by the TRP until 8 April 2024 to make the mandatory offer that is required under local takeover law to the shareholders of MultiChoice (JSE: MCG).
MC Mining (JSE: MCZ) has formally responded to the takeover bid by Goldway Capital Investment, priced at A$0.16 per share. The independent board’s advice to shareholders is to not accept the offer. There is a substantial document released to substantiate this view, which you can accessat this link. In summary, the independent board sees it an opportunistic offer that is between 20% and 30% below the pricing guidance in the initial non-binding takeover proposal.
Hyprop (JSE: HYP) announced that the acquisition of Table Bay Mall has been approved by the Competition Tribunal without any conditions being imposed on any party. The remaining condition precedent for the deal is the transfer of the property to Hyprop, anticipated to take place this month.
Kibo Energy (JSE: KBO) has sold shares in Mast Energy Developments (MED) to the value of £29k, with the proceeds being applied to reduce the outstanding balance on the RiverFort bridge loan facility.
Buka Investments (JSE: BKI) got off to a very slow start as a listed company, but has made some new director appointments that might be a precursor to some action.
No, this is not another fluff piece about the importance of humanity in creativity, designed to placate those who have lost their jobs to the heartless algorithm. This is the story of how creators around the world are standing up for their IP in unsurprisingly creative ways. Should artificial intelligence be quaking in its boots? Maybe a little.
Picture the following scenario: you’re using an image generator like Midjourney or Dall-E to create a visual for a campaign marketing fashion accessories. You type in the prompt “woman carrying a handbag”. The image generator spits out an image of a fashionable young woman carrying a toaster. Perplexed, you retype the prompt: “woman carrying a HANDBAG” – and receive another image of a woman holding a toaster. Unsure why this prompt isn’t working, you decide to try something else. You type in “woman wearing a hat” instead. The AI happily returns an image of a woman with a three-tier cake stacked on top of her head.
What is going on here?
What I’ve described is the future of AI, as seen through the eyes of its would-be disruptors. But why would anyone want to make artificial intelligence less effective? The answer to that question starts with how artificial intelligence became so smart in the first place.
The ethics of data scraping
The New York Times. Elon Musk. John Grisham, George R.R Martin and Jodi Picoult. These are just a few of the big names that have filed lawsuits against OpenAI since the launch of its deep learning model, ChatGPT, in 2020.
Generative AI systems, such as ChatGPT, work by interpreting user prompts through sophisticated algorithms. These algorithms are trained on extensive datasets, which are accessed by “scraping” and analysing billions of pieces of online text. At the heart of many of the lawsuits that OpenAI is facing is the question of who gave the company permission to access copyrighted materials for the training of its AI models.
It all sounds very vague when we talk about the IP attached to written words or images, so let me illustrate the problem for you with a more tangible example.
Imagine that you owned a bakery renowned for making a particular type of bread. One day, you come into your bakery to find a man in the corner who stands there all day, watching as you work. You did not give the man permission to be in your bakery and he won’t leave when you ask him to. The next day, he goes to the bakery around the corner and does the same thing there. And the day after that, he goes to a bakery two streets down and repeats the performance.
At the end of the week, the man opens a stall in the town square and starts giving free lessons on how to bake bread, incorporating signature techniques that he saw in your bakery and the others he visited. The enthralled public flock to his stall, and many of them go home and start baking their own bread. Next week, your bread sales are halved.
The authors who are filing lawsuits against OpenAI are making the case that the company is using material that they hold the copyright to without their permission (and, most importantly, without compensating them). Since OpenAI has been notoriously unforthcoming about where it sources its datasets from (remember, we’re talking about billions and billions of samples of text here), there is almost certainly a chance that they are drawing on copyrighted material from ebooks, scripts and online newspapers. Open AI has thus far neither denied nor confirmed whether this is the truth.
Instead, OpenAI is countering these arguments using a very open-ended exception to copyright protection known as “fair use”, which allows for the limited reproduction of text for uses like commentary or criticism. If you apply that argument back to our bakery example, that would be the man in the bakery claiming that anyone in the bakery (customers included) could look over the counter at any time and see the methods you are using to bake your bread.
It’s a tough argument to win and a bitter pill for creatives to swallow. While writers at the top of the bestseller lists are unlikely to be too affected by the rise in AI-generated writing, writers who work on a humbler scale (yours truly included) are working tirelessly to convince clients that their work is worth paying for. It’s hard not to feel that the whole situation is unfair.
It seems highly unlikely that the man with the stall in town square will be going away anytime soon. Fortunately, creatives never encountered a problem they couldn’t find an interesting solution for.
Define “sabotage”
While writers are taking AI to court, creatives in visual media are showing that they aren’t afraid to get hands-on when it comes to protecting what’s theirs.
In the same way that ChatGPT has disrupted the writing industry, AI-powered image generators have wreaked havoc in the art and design industries. The method for training these image generators also involves data scraping – and therein lies the crux of what might be AI’s undoing.
It started with Glaze, a tool developed by a team at the University of Chicago under the leadership of professor Ben Zhao. Glaze allows artists to “mask” their own personal style by changing the pixels of images in subtle ways. These changes are invisible to the human eye, but are powerful enough to manipulate machine-learning models to interpret an image as something different from what it actually shows. You can think of Glaze as a set of curtains in front of a window, obscuring a clear view of what’s inside.
While Glaze was designed as a countermeasure to IP theft, its sibling, Nightshade, takes a far more aggressive approach.
Developed by the same team at UC, Nightshade is a data poisoning tool that has the potential to break deep learning models by feeding them incorrect data. This tool strikes at the heart of AI’s biggest weakness – it needs to access vast amounts of data in order to learn. When the data is manipulated, the machine doesn’t know the difference; it simply absorbs the information that it is given without questioning whether that information is right or wrong. If you tell an image generating tool enough times that hats are synonymous with cakes, pretty soon it will believe you.
Just like many of the image generative tools that are out there, Nightshade is open source, which means that others are able to tinker with it, make their own versions, and distribute at scale. There’s a reason for this, according to team leader Zhao: the more people use it and make their own versions of it, the more powerful the tool becomes. The data sets for large AI models can consist of billions of images, so the more poisoned images can be scraped into the model, the more damage the technique will cause.
When an image generator starts spitting out images of weird animals with six legs and three eyes when prompted with “dog”, getting to the root of the problem is anything but simple. The poisoned data is very difficult to remove, as it requires tech companies to painstakingly find and delete each corrupted sample, of which there could be thousands.
As an artist who has always had a penchant for the surreal, I’d be lying if I said I wasn’t a little bit excited about the strange and twisted versions of reality that a poisoned image generator could produce. But I’m guessing the folks who are developing Google Gemini (and all the other models out there) are less excited about that prospect.
About the author:
Dominique Olivier is a fine arts graduate who recently learnt what HEPS means.Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.
She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.
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